While institutional investors are decidedly bullish on bonds, private equity and private debt, what speaks volumes about their mindset heading into 2024 is the degree to which they are worried about the geopolitical landscape.
According to Natixis Investment Managers’ annual survey of large institutional investors, they see the influence of geopolitical bad actors as the biggest threat to the economy (49%), slightly ahead of a pullback in consumer spending (48%) and a central bank policy error (42%). Among the geopolitical risk-factors they are considering:
- 70% think a growing alliance between Russia, North Korea, and Iran will lead to greater economic instability;
- 40% of institutional investors overall, including 47% in the United States, are actively divesting China holdings as most believe that China’s geopolitical ambitions (73%) and regulatory uncertainties (79%) have made the country a less attractive investment opportunity;
- 62% think emerging markets have been overly dependent on China, and 70% agree that conscious decoupling from China presents an opportunity for new emerging markets to climb the global ladder; and
- 59% predict that India will surpass China as the top emerging market for investment.
In addition, more than half (54%) of institutional investors predict that the outcome of the 2024 U.S. elections will be more relevant to global markets than in prior years. While 52% agree the election results will be mostly noise for the markets and less important than Fed policy (61%), most think that a messy election campaign will lead to increased market volatility (72%) and partisan divide will negatively impact global markets (71%).
The findings are based on Natixis IM’s survey conducted in October and November 2023 among 500 institutional investors who collectively manage $23.2 trillion in assets for public and private pensions, insurers, foundations, endowments, and sovereign wealth funds around the world. Survey participants also included 92 institutional investors in the U.S. responsible for the management of $4.4 trillion in assets.
2024 Outlook
Overall, the survey found institutional investors’ 2024 outlook to be muted. About half (51%) think recession is inevitable, a sentiment that runs strongest in the U.S. (62%) and U.K. (67%).
Of those in the recession camp, 74% expect it to be painful or very painful. Notably, however, the number of institutions that no longer see recession anywhere on the horizon has more than doubled to 37% from 15% a year ago.
Views on the stock market are roughly split between bulls (46%) and bears (54%). As to the Fed, 61% of respondents expect rates to remain higher for longer, though 51%—including 55% in the U.S.—expect rate cuts in 2024, starting in the second (32%) or third (38%) quarter.
“The markets have demonstrated tremendous resilience in absorbing a sharp rise in rates, inflation, and two wars so far in 2023,” said Liana Magner, Executive Vice President and Head of Retirement and Institutional for Natixis IM in the US. “While institutional investors anticipate plenty of headwinds in the year ahead, few are lowering their assumed rate of return for 2024, and long-term return expectations remain solidly at 8% on average.”
Portfolio Positioning
Meanwhile, most institutional investors (59%) are forecasting an uptick in stock market volatility, and 41% expect a higher level of dispersion in returns. This is likely a key reason why nearly 7 out of 10 (68%) institutional investors expect active management to again outperform in 2024, the report notes.
Additionally, the impact of higher-for-longer rates and inflation remains a top portfolio risk and is reflected in institutional investors’ outlook for the markets and consensus calls. The survey found:
- 56% of institutional investors are actively de-risking their portfolios heading into 2024.
- More than two-thirds (69%) are bullish on the performance of bonds, with 62% calling for longer-duration bonds to outperform short. For corporates, their allocations stress quality as 76% expect higher rates and slowing growth to lead to an increase in corporate defaults.
- Most continue to be bullish on private equity (60%) and private debt (64%), with 66% saying there is still a significant delta between private and private assets.
- 61% expect large-cap stocks to outperform small-caps, and 57% think international markets will outperform. The exception is among U.S. institutions, where 65% think U.S. stock market performance continues to lead the rest of the world.
- 52% expect the IT sector to outperform the stock market, as it did in 2023. Many also expect outperformance by the energy (49%) and healthcare (48%) sectors.
“Macroeconomic and market uncertainty complicate the outlook for 2024, and not knowing what will happen next can contribute to higher levels of market volatility,” observed Dave Goodsell, head of the Natixis Center for Investor Insights. “The portfolio is where it comes into focus, and most institutional investors tell us they’ve shored up their portfolios for known risks.”
AI: Boon to Productivity or Existential Threat?
As to the prospects for artificial intelligence, institutional investors are finding both good and bad in the rapid progression of AI. According to the findings:
- 75% of institutional investors think AI will unlock new investment opportunities and 63% think it will uncover portfolio risks that were otherwise undetectable.
- 66% see the race for AI supremacy as the new space race and one that will supercharge growth in the tech sector.
- 50% believe AI could be a bigger investment opportunity than the Internet was, and for now, few (35%) are worried about AI being a bubble.
- 81% think it will be difficult for any country to effectively regulate AI.
While most aren’t worried, nearly 4 in 10 (39%) think the downside risk of AI outweighs the opportunity it presents, and 38% think that if unchecked, AI represents an existential threat to civilization as we know it.
A full copy of Natixis IM’s Institutional Investor Outlook for 2024 can be found here.
